Black-Scholes equation

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Updated: Aug 20, 2021

An equation used to value financial options. The Black-Scholes equation is based on a model of equilibrium in financial markets with continuous trading. That is, asset prices potentially change at every instant in time. The model assumes that there is a risk-free asset and that all excess returns are eliminated by arbitrage. The method of Black-Scholes is to develop a partial differential equation that the price of every option must satisfy.

Black-Scholes equation

The value of a particular option is found by solving the partial differential equation using as boundary conditions the characteristics of that option.

Reference: Oxford Press Dictonary of Economics, 5th edt.



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James Knight
Editor of Education
James is the Editor of Education for Invezz, where he covers topics from across the financial world, from the stock market, to cryptocurrency, to macroeconomic markets.... read more.